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ECON0001: ECONOMICS OF FINANCIAL MARKETS

Assignment 5

Uncorrelated noise traders orders. Modify the market transparency setup, assuming that if noise traders are present, each independently chooses to place either a buy or a sell order. In other words, we can have the following orders by noise traders: (buy, buy), (buy, sell), (sell, buy), (sell, sell), each occurring with probability (1 − π)/4.

a)   Compute the bid and ask prices under pre-trade transparency and opaqueness.

b)  How do the predictions of the model change?